GST on the horizon, economy looking up

Banks are flush with funds after demonetisation, but for some reason they are still not bringing down rates.

The economy has a spring in its step with several tax reforms and particularly with the game-changing Goods and Services Tax soon to become a reality. Some experts feel the GST’s introduction will lead to a 1-2 per cent rise in GDP, but others feel this is an exaggeration. It’s only after GST’s implementation that we’ll be able to see its real impact on the economy. But what can be said with some degree of reasonableness is that it will lead to more simplification and more transparency in taxation, and hopefully a decrease in corruption. This will help in the ease of doing business, though not entirely. One of the outcomes of the Narendra Modi government’s reform policies and several administrative moves is the strengthening of the rupee against the dollar.

Exporters are distraught with the Indian rupee getting stronger against several other currencies, while importers have welcomed this situation. The exporters’ problem is understandable with the Indian currency stronger than the currencies of those who are their competitors in the same market. But consumers are a major beneficiary as oil imports are cheaper, and this is already reflected in the cut in petrol and diesel prices. There is also a lesser burden on the government’s subsidy outgo. Engineering exports, for instance, have picked up despite the rupee strengthening due to other factors. The economy too has thus benefited. However, the rupee is unlikely to remain strong for too long. US President Donald Trump has vowed to give the dollar back its pre-eminent position, and the US greenback is expected to strengthen. The Americans, however, don’t think Mr Trump’s policy is wise as their businessmen feel threatened. So one has to see how this policy evolves, with Mr Trump also aiming to bring all American businesses back to the US.

Exporters have to rough it out and look for other avenues of growth. Perhaps they could do more home marketing as domestic consumer demand is strong and helping the economy to grow. But there is a deeper malaise that can’t be overlooked: investment is still not forthcoming from the private sector. This is a major concern. It is also doubtful if RBI can do much on this when it announces its credit policy this week. Banks are flush with funds after demonetisation, but for some reason they are still not bringing down rates. They should lower their rates in line with the rate cuts by RBI over the past year and a half. The banks are also not lending as companies are highly leveraged and banks are wary of adding more non-performing assets on their books. It’s a chicken and egg situation, and it may be unwise to expect the RBI to break what looks like a logjam.